Topic 9 - Demand

Question 1

Increase in income

Answer 1

Budget line shifts out.

Question 2

Normal good

Answer 2

Demand increases with income.

Question 3

Inferior good

Answer 3

Demand falls as income increases

Question 4

Income offer curve

Answer 4

A line on a graph that shows the best choice of two goods at different income levels while prices remain constant

Question 5

Engle curve

Answer 5

Shows the relationship between income and demand. All prices are held constant. m on the vertical axis.

Question 6

Perfect substitutes

Answer 6

Engel curve with slope = p1.
If p1<p2 consumer specializes in good 1, will then spend all income on good 1.

Question 7

Perfect compliments

Answer 7

Engle curve slope = p1+p2. engle curve goes through the corner of the L shaped ICs

Question 8

Cobb-douglas preferences

Answer 8

demand for good 1 has the form: x1=am/p1
Engle curve is a straight line with Slope= p1/a

Question 9

Luxury good

Answer 9

Demand increases more than proportionately than income

Question 10

Necessary good

Answer 10

Demand increases by a lesser proportion than income

Question 11

Homothetic preferences

Answer 11

Consumer preferences only depend on ratio of good 1 to good 2 e.g. (x1, x2) is preferred to (y1, y2) then (2x1, 2x2) will be preferred to
(2y1, 2y2).

Question 12

Ordinary good

Answer 12

Demand increases as price falls

Question 13

Giffen good

Answer 13

Demand is reduced as price falls

Question 14

Falling prices of x1

Answer 14

As x1 price decreases (x2 stays the same) the budget line stretches out. Keeping the vertical intercept the same but shifting the horizontal intercept to the right

Question 15

Demand curve

Answer 15

Plot of demand function